TIF 101, S.191, S.283

February 4, 2020

Graham Campbell, Senior Fiscal Analyst

Rebecca Wasserman, Legislative Counsel

What is TIF?■ Used by municipalities and states to finance economic

development by diverting a portion of the growth in future

property tax revenues

■ Steps to a TIF:

– 1) Municipality seeks to improve a geographic area (downtown

plot , blighted land, brownfield) by investing in new infrastructure

(sidewalks, parking, streetlights, sewer)

– 2) These improvements stimulate private development of the area.

– 3) Municipality finances these infrastructure improvements with

borrowed funds.

– 4) Municipality pays back the borrowing using a portion of the

increased tax revenues as result of improvements to the area

What is TIF?

Joint Fiscal Office 3

4

6

8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

An

nu

al ta

xes g

en

era

ted

TIF Retention Period

Basic TIF Model

Base revenuesRevenues prior to development that continue to flow to

the municipality

Tax IncrementNew taxes that occured after development of property

New Tax BaseAfter the municipality has

repaid its debt using the tax increment, the municipality

receives the full portion of the new tax base

Tax increment diverted to fund development projects

Post-TIF (after retention period ends)

Pre-2006 Vermont TIF Landscape

■ TIF authorized in statute in 1985

■ Prior to 1998, TIF districts in VT were municipal constructs

– All incremental tax revenues were municipal property taxes

– No state involvement, other than establishing ability for towns to create

■ Act 60 of 1997 established a statewide property tax

– Allows TIF districts to capture two types of tax increment:

■ Statewide Education Property Tax

■ Municipal Property Tax

Pre-2006 TIF Districts:Legislative History■ TIF districts created under the TIF enabling legislation (Act 87, 1985):

– Burlington (Waterfront) TIF district authorized in 1996 (City voted to expand in

1997)

– Newport TIF district authorized in March 1997

■ Changes in education financing to statewide property tax (Act 60, 1997)

– Grandfathers Burlington (waterfront) and Newport TIF districts to allow for use

of the new State education property tax increment

■ VEPC authorized to approve additional TIFs as part of the Economic Advancement

Tax Incentive Program (job creation) (Act 71, 1998):

– Milton (North/South) TIF district approved under this authority

■ Winooski TIF district created through special legislation (Act 159, 2000)

Post-2006 Vermont TIF Landscape

■ In 2006, the Legislature set out the VEPC approval process and

framework for new TIF districts.

– Establishes a percentage split for incremental statewide

property tax revenues of 75% TIF district, 25% state

– Establishes location criteria: TIF must be in two of the following:

High density or compact area, approved downtown center, or

an economically distressed area

– Establishes specific project criteria for a TIF district to be

established.

– TIF districts could not retain more than 20 years of statewide tax

property tax revenue from first debt.

Post-2006 TIF Districts and Authorities

TIF districts created prior to

VEPC approval process:

Burlington (Waterfront);

Newport;

Milton (North/South); and

Winooski

TIF districts subject to VEPC

approval process:

Milton (Town Core);

Burlington (Downtown);

Colchester;

Hartford;

St. Albans; and

Barre

Post-2006 TIF Districts: Legislative History■ TIF District Caps

– Act 184, 2006: Caps districts at 10, with no more than 1 per town for a five-year period, ending June 30, 2011.

– Act 190, 2008: Caps districts at 6, with no more than 1 per town for a five-year period ending June 30, 2013.

– Act 80, 2013:

■ Prohibits any additional districts other than Burlington (Downtown), Burlington (Waterfront), Milton (North/South), Newport, Winooski, Colchester, Hartford, St. Albans, Barre, and Milton (Town Core); and

■ Allows for a South Burlington TIF if approval granted by December 31, 2013.

– Act 69, 2017: Caps districts at 6 more for the entire State and no more than 2 per county (11 active, 4 up for grabs).

Post-2006 TIF Districts:Legislative History■ Tax Increment:

– Act 134, 2016: Extends period for Burlington to retain increment (municipal and education).

– Act 69, 2017: Requires municipalities to dedicate at least 85% of their municipal increment,

and sets up a 70% TIF district/30% state split of education property tax increment revenues.

■ Debt Incurrence:

– Act 190, 2008: Amends when debt can be incurred and retroactively approved type of debt

used for Burlington.

– Act 54, 2009: Reopened Burlington (Waterfront) for debt purposes, and changed

requirements for Milton (Town Core) to incur debt.

– Act 80, 2013: Burlington (Waterfront) permitted to incur debt for an additional five years,

beginning January 1, 2015.

– Act 134, 2016: Extends the time period that certain parcels in the Burlington (Waterfront)

district can incur debt.

Key terms in Vermont TIF world■ Improvements: installation, new construction, or reconstruction of infrastructure

that will serve a public purpose and fulfill the purpose of tax increment financing

districts.

– TIF Rule (2015) includes installation, new construction or reconstruction of

municipal capital assets in the definition.

– Includes things like utilities, transportation, civic facilities (parks, trails,

playgrounds, libraries, city offices),

– Also includes property and land acquisition, property demolition and

improvements, environmental remediation.

■ DOES NOT INCLUDE:

– Municipal operating costs, public transportation operating costs, annual

maintenance expenditures, repair costs, purchase of vehicles, interior

furnishings, other expenditures for non-capital assets.

■ More generally: what a municipality can use bond proceeds for.

Joint Fiscal Office 10

Key terms in Vermont TIF world

■ Related Costs: expenses incurred and paid by the municipality, exclusive of the actual cost of constructing and financing improvements, that are directly related to the creation and implementation of the tax increment financing district.

– Includes any reimbursements advanced by the municipality for these purposes.

– Also includes municipal expenses such as departmental and personnel costs of administering the district

– Per TIF Rule (2015), also includes:

■ Costs of plans, studies, reports related the district

■ Costs of notifying the public of district plans

■ Soft costs such as consulting, design, architects, engineering, accounting, legal, project management and other professional services

■ The costs of audits by the State Auditor and the annual municipal audits

■ DOES NOT INCLUDE:

– Costs of direct improvements such as construction, financing, debt costs

– Any costs incurred by private entities undertaking development

– Municipal operating costs

– Capitalized interest or the funding of reserves.

Joint Fiscal Office 11

“Improvements” vs “Related Costs”

Joint Fiscal Office 12

Bond proceeds Improvements• Public infrastructure

• Transportation improvements

• Land acquisition

• Prepayment of related costs

• Reserves funds?

Tax increment Related Costs• Principal and interest on bonds

• Any reimbursements made from other municipal funds

• Administration of the TIF district

• Professional services used in creation of district

• Audits

Funding of Reserves

■ The cash-flow issue with TIF

– 1) Municipality takes out bonds to construct new infrastructure

– 2) Infrastructure takes years to build and private development comes after the

infrastructure is built.

– 3) No increment (sometimes negative increment) is generated during these

years

■ The problem: how does a district pay principal and interest on the outstanding debt

and related costs when no increment exists/is not sufficient?

– This issue exists with every TIF district in the country

■ Right now, the municipality has two options:

– Pay it out of existing resources

■ For related costs like TIF district plans/applications, this could be the only option

– Raise property taxes to make the payments

Joint Fiscal Office 13

Funding of Reserves in S.191

■ State Auditor identified the funding of a reserve fund using bond proceeds in St. Albans.

That reserve was used to pay debt service on using that same debt.

– AG office said this was not an allowable use of bond proceeds because a debt

reserve was not a “improvement”

■ S.191 codifies this practice in statute.

– Funding of debt service reserve using bond proceeds for up to six years after a TIF

district is created.

Joint Fiscal Office 14

Pros and Cons of Debt Reserves

Joint Fiscal Office 15

Pros• Solves the cash flow issue

particularly in towns with limited

financial resources and taxpayers

unwilling to support any tax (even if

small) increase

• This is currently a practice

happening in Vermont TIF districts.

What happens if you disallow it?

Cons• If many districts do this, a non-trivial amount of debt

is not being used on investment in TIF districts.

• TIF district plans were approved by VEPC and voters

based on a certain promised amount of investment

using debt.

• Takes pressure off towns to start building as soon as

possible. Could incentivize towns to create districts

when they aren’t ready.

• Removes risk to the municipality.

• Makes it easier for financially weaker towns to have

TIF districts.

• Using debt to pay for outstanding debt can increase

interest costs because more debt is incurred

Improvements, Related Costs, and Funding of Reserves

24 V.S.A. § 1751(3)

2006 Acts and Resolves No. 184,

Sec. 2a

(Amending 24 V.S.A. § 1891 )

2007 Acts and Resolves No. 190,

Sec. 54

(Amending 24 V.S.A. § 1891 )

(6) “Related costs” means expenses,

exclusive of the actual cost of

constructing and financing

improvements, as defined in

subdivision 1751(3) of this title, that

are directly related to creation of the tax

increment financing district and

reimbursement of sums previously

advanced by the municipality for those

purposes, and attaining the purposes

and goals for which the tax increment

financing district was created, as

approved by the Vermont economic

progress council. As used in this

subdivision, related costs are

“improvements” as defined in

subdivision 1751(3) of this title.

(6) “Related costs” means expenses,

exclusive of the actual cost of

constructing and financing

improvements, as defined in

subdivision 1751(3) of this title, that

are directly related to creation of the

tax increment financing district and

reimbursement of sums previously

advanced by the municipality for

those purposes, and attaining the

purposes and goals for which the tax

increment financing district was

created, as approved by the Vermont

economic progress council. As used in

this subdivision, related costs are

“improvements” as defined in

subdivision 1751(3) of this title.

(3) "Improvement" shall include, apart from its

ordinary signification:

(A) The acquiring of land for municipal purposes,

the construction of, extension of, additions to, or

remodeling of buildings or other improvements

thereto, also furnishings, equipment, or apparatus

to be used for or in connection with any existing or

new improvement, work, department, or other

corporate purpose, and also shall include the

purchase or acquisition of other capital assets,

including licenses and permits, in connection with

any existing or new improvement benefiting the

municipal corporation, and all costs incurred by the

municipality in connection with the construction or

acquisition of the improvement and the financing

thereof, including capitalized interest, underwriters

discount, the funding of reserves, and the payment

of contributions to establish eligibility and

participation with respect to loans made from any

State revolving fund, to the extent such payment is

consistent with federal law.

* * *

Bond Anticipation Notes (BAN)

■ What is a BAN?

– Typically, it is a short-term debt instrument is less than a year in maturity.

– A municipality will use BAN when they want to finance a long-term project using

a longer term bond but there is a delay in getting the money.

■ The issuance of the long-term bonds may not be possible before the launch of the

project because of legal, regulatory or compliance issues, so they use BAN to get

the projected started.

– Once the municipality receives the proceeds for the longer-term bond, they

retire the BAN.

– Often used as a means of kick-starting funding efforts for new projects.

Joint Fiscal Office 17

BAN, TIF and S.191

■ TIF districts in Vermont must incur debt within 5 years of creation. If not, the district

dissolves. Districts can receive an extension up to 5 years.

■ TIF districts can retain tax increment 20 years after the incurrence of the first debt.

■ TIF statute does not make any reference to the use of BAN for TIF districts.

■ Outstanding questions:

– Does BAN count as an debt incurrence? Or is the larger bond “start the clock?”

– What happens if a municipality uses a BAN in year ten but the larger bond is

issued in year 11? Did it follow statute?

■ S.191 clarifies this to say that BAN can only be used within the first five years.

Joint Fiscal Office 18

TIF District Boundaries and S.191

■ Under current TIF rule, any change to TIF boundaries must go through a Substantial

Change request through VEPC.

■ S.191 clarifies two parts:

– Any parcel within a district shall be wholly within the boundaries of the district

■ Even if the boundary bisects a parcel, the entirety of the parcel is located in the

district and wholly included in the Original Taxable Value and calculations of

increment

– No adjustments to a boundary are permitted after the approval of the TIF

district.

■ Some municipalities have testified that they intentionally draw their boundaries

small with the understanding that they could extend their boundaries in the future.

Joint Fiscal Office 19

Calculating Tax Increment and S.191 ■ S.191 clarifies two potential issues that arise for municipalities when calculating the

total tax increment:

– What happens if a parcel(s) in a district is also subject to a tax stabilization

agreement?

■ S.191 clarifies that the increment shall be calculated as the difference between the

current value of the parcel minus the assessed value of the parcel on the grand list,

not the stabilized value

– What happens if the value of a parcel(s) decreases instead of increases?

■ This happens often in TIF districts when existing buildings are torn down and

replaced with new private development.

■ S.191 clarifies that if the value of property decreases, the municipality is

responsible for paying the tax due on the Original Taxable Value, not the decreased

value.

Joint Fiscal Office 20

S.283: Town of Hartford

■ TIF districts have until 5 years after creation to retain debt. They can also ask VEPC for a 5 year

extension

– Therefore, up to 10 years to accumulate debt

■ Hartford TIF district was created in 2011 so it has until 2021 to incur debt

■ As of January 2020:

– Total debt approved by voters: $9.2 million

– Total debt incurred: $3.0 million

■ Total debt to be incurred by 2021: $9.2 million

– $6.2 million will be incurred between 2019 and 2021

■ Total anticipated debt at application: $12.9 million

– This means $3.7 million in projects will not have financing by 2021.

– Hartford is asking for 3 more years to incur debt so it can incur debt for remaining projects

Joint Fiscal Office 21

S.283: Town of Hartford

■ Considerations for Legislators:

– If S.283 does not pass, would Hartford change development plans?

– TIF district carve-outs in statute create/perpetuate precedents

– Creating districts when development is not ready

– Does extending the debt window beyond 10 years takes pressure of municipality to start

building?

– Extending debt incurring to 2023 means Hartford has only 11 years to retain increment

for debt service.

Joint Fiscal Office 22